If you’re reading this, chances are you own a smartphone and can’t remember the last time you rented a DVD from a store (i.e. not Redbox). You may not have a landline, and if you do, you may only keep it because it’s free when bundled with Internet and TV service. The telephone and movie rental industries are just two examples of the countless industries that have been disrupted by newcomers with new technology, better products, and/or better methods of delivery.
Value gained, value lost
Think of the value gained and lost with each disruption. Since 2007, the year iPhone was released, Blackberry has lost 94% of its market value (from about $67 billion to $4 billion). During that same time, Apple's market value has increased by about 850% (from about $70 billion to $650 billion). That’s almost $600 billion of value created in only 8 years!
Investors who correctly predict (1) the industries that will be disrupted and (2) the companies who lead the disruption realize the bulk of the value created. Of course, on the flip side, investors and management stand to have their value destroyed if they fail to see the disruptors coming and adapt accordingly.
Industries ripe for disruption
Two industries I’m involved in are ripe for disruption. Both generate 95-97% of sales from brick and mortar stores. End consumers pay inflated prices due to the costs of physical locations and layers of middlemen who each take their cut.
Startups have just begun entering both industries with disruptive business models. They are using technology and other innovations to reduce the layers of cost between the manufacturer and the end consumer. They are making the customer experience better AND cheaper.
Building materials industry
In my last post I wrote about the mattress industry. In this post I’ll write about the building materials industry.
Due to high mark-ups at each distribution level, consumers typically pay more than four times the cost of materials and labor to assemble a mattress.
The building materials industry doesn’t have quite the same margins, but participants make up for it with volume. Compared to the $14 billion US mattress industry, US home improvement is a many times larger $520 billion industry.
The buying process hasn't changed much for a very long time. The industry has maintained the status quo largely due to the size and weight of most materials and the perceived need by consumers to spend time choosing products from showrooms.
Startups are disrupting the building materials industry
However, new startups are now figuring out how to disrupt this entrenched industry. They are finding that they can match buyers and manufacturers online, quickly ship samples for review, and painlessly arrange the delivery logistics.
Build Direct is a leader is this disruption. Late last year they raised $50 million to build out their Home Marketplace platform, which they are now launching.
This platform is doing for building products what Amazon has done to other products like books, music, and electronics.
This platform allows homeowners and contractors to buy directly from manufacturers at wholesale prices. Build Direct ships free samples to aid the buyer decision, and then its proprietary logistics platforms figures out the fastest and cheapest way to ship the product to the buyer’s door. Buyers can do all this from the comfort of their own homes.
The platform gives manufacturers direct access to customers throughout North America and even the world. It provides analytics to help the seller with pricing and warehouse location decisions.
Traditionally, building product manufacturers don’t have access to the people who actually use their products. They can’t gather data about who they are, where they are, and what feedback they have. Any information is filtered through retailers who have no incentive to facilitate this contact.
Build Direct is leading the way, but like the Blackberry’s and LG's of the cell phone market, there is potential for further disruption by innovative new entrants.
What does this mean for you?
There’s a good chance that you’ll be looking for home-related products in the near future. You can be aware of cheaper and easier ways to buy.
If you’re an investor, you can look for opportunities to invest in this new trend and share in the value creation.
If you’re an entrepreneur, you may see opportunities to contribute to the disruption.
If you’re involved in any other industry, you can recognize that your industry will be disrupted. You can adapt and be part of the disruption, or you can be one of the value-losing stories. Be a student of your industry. Be aware of the history and the newest developments. It’s not easy to predict which trends will be fads and which will be disruptive, but at least be aware of what’s out there.
Look for significant value to be created by new startups and significant value to be lost by incumbents that don’t adapt. This is the world we live in, and it’s an exciting time to be alive!
Question: What other industries are ripe for disruption?